India’s New Labour Law Reforms (2026): What Employers Need to Know
Effective 21 November 2025, India has consolidated 29 labour laws into four unified Labour Codes. The most significant impact for 2026 is the 50% Wage Rule, which mandates that basic pay must comprise at least half of an employee’s total CTC. This shift increases statutory costs like PF and Gratuity by 5–15% for most employers.
What Are the 4 New Labour Codes in India?
India has replaced its fragmented legacy legal system with four streamlined regulations: the Code on Wages (2019), the Industrial Relations Code (2020), the Code on Social Security (2020), and the Occupational Safety, Health and Working Conditions Code (2020). These codes provide a single national framework for employment.
Why was this consolidation necessary?
Previously, a company had to comply with nearly 30 different central laws and hundreds of state-level rules. By merging these into four pillars, the government aims to:
- Standardize definitions: “Wages” now means the same thing for PF as it does for Gratuity.
- Reduce compliance drag: Digital-first registrations and a single “Inspector-cum-Facilitator” model replace redundant audits.
- Formalize the workforce: Bringing gig, platform, and fixed-term workers under a legal safety net.
For organizations navigating this transition, utilizing an India Employer of Record (EOR) can mitigate the risk of misinterpreting these legacy-to-modern law mappings.
How Does the 50% Wage Rule Impact Payroll Costs in 2026?
The 50% Wage Rule stipulates that an employee’s “Wages” (Basic Pay + Dearness Allowance) must be at least 50% of the total remuneration (CTC). If allowances like HRA or Special Allowance exceed 50%, the excess is treated as “wages” for calculating statutory contributions.
Financial Breakdown for Employers
Historically, employers kept basic pay low to reduce PF and Gratuity liability. Under the new wage code, the “wage base” for these contributions rises significantly.
| Cost Component | Old Salary Structure | 2026 Labour Code Structure |
|---|---|---|
| Basic Pay % | Typically 25% – 35% | Minimum 50% |
| PF Contribution | Calculated on ~30% of CTC | Calculated on 50% of CTC |
| Gratuity Liability | Lower base (Basic only) | Higher base (Basic + Excess Allowances) |
| Estimated Cost Rise | Baseline | +5% to +15% per employee |
Strategic Advice: Organizations should immediately perform a payroll audit to model how this restructuring will affect their annual manpower budgets.
What are the New Gratuity Rules for Fixed-Term Employees?
Under the Code on Social Security (2020), fixed-term employees (FTE) are now eligible for pro-rata gratuity after just one year of service. Previously, workers typically had to complete five years of continuous service to qualify for any gratuity payout.
Parity of Benefits
The law now mandates that fixed-term employees must receive the same wages, hours, and social security benefits as permanent employees performing the same or similar work. This removes the “cost advantage” of hiring temporary staff and focuses the hiring strategy on project-based needs rather than cost-cutting.
Are Gig and Platform Workers Covered Under India’s New Laws?
Yes. For the first time, India’s Code on Social Security formally recognizes Gig Workers and Platform Workers. Digital aggregators (like delivery or ride-sharing apps) are now required to contribute 1–2% of their annual turnover to a Social Security Fund managed by the central government.
What this means for the “Gig Economy”:
- Safety Net: Millions of unorganized workers will gain access to life, disability, and health insurance.
- Platform Responsibility: Companies must register their platform workers on a centralized portal and ensure compliance with contribution timelines.
What is the “48-Hour Full and Final Settlement” Rule?
Under the new Labour Codes, an employer must complete the Full and Final (F&F) settlement of an employee’s wages within 48 hours of their removal, dismissal, retrenchment, or resignation.
This is a major operational shift. In the past, F&F settlements were often processed in the following month’s payroll cycle. To meet this 48-hour window, businesses require automated payroll technology that can calculate leave encashment, notice period adjustments, and statutory dues in real-time.
Next Steps for HR and Finance Leaders
As the April 2026 deadline approaches, the burden of compliance is shifting toward digital transparency. Employers should:
- Redefine CTC Structures: Ensure the 50% basic pay rule is met.
- Review Vendor Capability: Ensure your Payroll or EOR provider is updated for the new definitions.
- Audit Worker Categories: Re-classify FTEs and contract staff to ensure benefit parity.
Visit TopSource for more information related to the India Payroll.
Frequently Asked Questions
The codes were officially notified on 21 November 2025. While some implementation windows vary by state, the central government has targeted April 1, 2026, for full operational parity across all sectors.
Yes. Women can work night shifts (7 PM to 6 AM) provided they give their explicit consent and the employer ensures a safe working environment, including secure transportation and adequate workplace facilities.
Yes. The OSHW Code makes it mandatory for every employer to issue a formal appointment letter to every employee or worker. This applies to all industries, replacing the old system where appointment letters were only required in specific “scheduled” employments.
Any work performed beyond 9 hours in a day or 48 hours in a week is considered overtime. Employers must pay overtime at twice the normal rate of wages.